9/25/2009 @ 6:00AM

The VC Quandary

Last week I talked about how to seduce a VC. But just because you can doesn’t mean you should. Entrepreneurs need to make a careful evaluation of whether or not raising venture money is necessary, and when is the best time to do so. For one thing, most start-up ideas are small, not the kind of big ideas that warrant the venture financing model. But these smaller and niche ideas, which are more likely to be built from a bootstrapped business model, are every bit as important as the big ones that get venture funding.

I recently published a book called Bootstrapping, Weapon Of Mass Reconstruction that discusses this issue at length. Much of this book was written in 2008, as Barack Obama ascended to the White House, and Wall Street descended to the poor house. While Obama’s message of hope banners were plastered on shop windows, front lawns and seemingly every bumper of every car in the Bay Area, our financial market simply collapsed.

“What next?” was the burning question at the top of my mind. And as a result, readers will find this second volume of Entrepreneur Journeys laced with political nuance, as well as a genuine attempt to understand what might deliver America, and the world at large, from its dire present day.

So, what next? Where might we go from here? From my perspective, it is clear that small business must be a top policy priority. There are approximately 5 million small businesses in the United States with fewer than 20 employees. Another 20 million mom-and-pop endeavors toil day in and day out without employees. Let us hope that in the coming decade those numbers will double, then triple and quadruple. For here is the most powerful engine of economic growth and sustenance. Here is our way back.

If the next
Google
is to emerge and bring with it thousands of new jobs, it must first start over some kitchen table where not only hope, but opportunity, is readily available. Where entrepreneurs not only start businesses at a higher rate, but also survive and thrive at a higher rate.

To achieve this we must answer several questions: Why don’t more businesses get off the ground? And, once set up, why do so many fail?

Through much discussion, writing and brainstorming on each topic, I arrived at a core thesis: Not just entrepreneurship, but bootstrapped entrepreneurship is the true weapon of mass reconstruction.

Businesses often fail to take flight because they cannot raise funding. Well, start with the assumption that funding will not be available until the business is much further along, and that bottleneck is removed.

Additionally, most businesses should not look to raise money. As true small businesses–in the eyes of venture capitalists, even a $5 million or $25 million business is considered a small business–they do not really fit the framework of professional venture capital. That does not, however, mean these businesses are not worth building. In fact, a $12-million-a-year company fully owned by the entrepreneur is a wonderful situation. Full control. Loads of cash. And true independence. Heck, even a $300,000-a-year business has many of those same attributes and is more than worthwhile.

Now, why do so many small businesses fail? Undoubtedly, there are many complex reasons, but a primary one is that they run out of cash. They use whatever resources they have imprudently, and end up destitute. The offices empty through rounds of layoffs. Boxes are packed, projects shelved. A final liquidation and the unerring quiet of failure.

This, however, is not the inevitable end.

To preserve cash, save time and get as much done with very little, a critical factor is an efficient and thorough positioning and go-to-market strategy. In the third volume, Positioning: How To Test, Validate, and Bring Your Idea To Market, I have specifically focused on this topic. It is a discipline entrepreneurs need to master if they have any aspirations of raising money. Even in building a company with limited resources, a crisp positioning is essential to avoid the spray-and-pray method that sucks up resources, while delivering little more than the kiss of death.

Professional investors–especially venture capitalists–demand three things to validate an investment: market, team and technology. The priority of the three varies. Some prefer a strong team over a well-defined market opportunity. Others put market first. I belong to the latter camp. Too many times have I seen great entrepreneurs beating their heads against markets that simply do not exist; too many times have I seen solutions from great technologists searching for problems to solve.

The greatest tool I have found in defining a cost-efficient go-to-market strategy is segmentation. Tightly segment your market, finding niches where your product or service has immediate applicability and minimum competition, and your chance of success goes up exponentially.

Furthermore, positioning needs to be looked at as a holistic effort, spanning not only value proposition, messaging and competitive strategy, but also pricing and channel implications. If you have a $5,000 product, direct sales are off the table. Imagine having to visit every customer five times to close a $5,000 deal? Not cost-effective. Doesn’t make business sense.

In this volume, everything is about accuracy, about knowing your customer rather than guessing who they might be. You will hear Matthias Mischke narrow Stardoll’s focus to girls age 8-18. Siva Kumar focuses TheFind on Internet-savvy women in the 25-45 age group with a household income over $80,000. Later, Jim Heeger explains how PayCycle acquires its small-business customers. With similarly crisp segmentation, targeting only those businesses with fewer than 20 employees, PayCycle needed a way to reach clients without high-touch direct selling or even telesales. Jim offers the how.

As you follow the road map these case studies offer, notice the commonality of sharp positioning and undeniable success. By analyzing their markets and ecosystems with laser accuracy, clearly articulating the exact problem they solve and how their solution differs from the competition, these entrepreneurs have gained unfettered access to hungry customers and even hungrier VCs. These entrepreneurs make clear that their market opportunity is no gray area–it is precise, and not so patiently waiting.